Investors banking on friendlier economic skies

John Dimsdale Nov 22, 2006

KAI RYSSDAL: Let’s tick ’em off just to keep track. Creditors of bankrupt Delta Airlines are telling company executives they ought to reconsider their rejection of an $8 billion bid from US Airways. Continental says it’s open to at least talking about a merger. And today a group of private investors made a buyout offer for Australia’s flagship carrier Qantas. Marketplace’s John Dimsdale wraps it all up for us.

JOHN DIMSDALE: Airlines haven’t exactly been attractive takeover targets for private investors since 9/11. Most airline companies here in the U.S., for example, have investment ratings in the junk bond category.

Australia’s Qantas is one of the rare exceptions, says Nicholas Ionides of Air Transport Intelligence.

NICHOLAS IONIDES: Qantas is an airline considered to be well managed. As many airlines in the world are losing money, it is making decent money. Decent by airline standards, which is not good from many other industries.

The Texas Pacific Group and Australia’s Macquarie Bank see $8 billion worth of value in Qantas. In the booming Asian economies, Qantas is flying in a good market right now, says Phillip Baggaley, an airline analyst for Standard & Poor’s Ratings Service,

PHILLIP BAGGALEY: The industry is in an up-cycle and that’s most apparent in the Asia Pacific region. Qantas has strong market shares in the markets where they participate.

But Baggaley sees risks for the private investors who are leveraging Qantas’ assets to pay for the buyout. For example, Qantas will need some expensive new airplanes soon.

BAGGALEY: They may be seeing free cash flow now, but, one, things can change quickly in this industry and, two, Qantas has major investment needs coming up.

In addition to all this merger and acquisition activity, passengers may see other signs of recovery in the hard-hit airline industry. Pillows, hot towels and even snacks are showing up again — at least in first class.

In Washington, I’m John Dimsdale for Marketplace.

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